An inevitable tension between investors and entrepreneurs

I’ve just read Bill Barnett’s article on Winning as a self-fulfilling prophecy which argues that optimists’ irrational belief in their chances of success makes them to try longer and harder to get there and makes them better motivators and leaders of teams. They are therefore more likely to succeed than people who are more even headed. He cites Steve Jobs as an example:

Steve Jobs was said to have been surrounded by a “reality distortion field,” in that he would believe in possibilities even when others saw them as unthinkable.  Of course, once Steve believed, then others would too – making his vision more likely to come true.

As an investor I want to back the entrepreneurs who are most likely to succeed, and as described above that means optimists. On top of that we also like optimists because they take on bigger challenges. So we back optimists. But we want our own decisions to be the best they can be, and that means seeing reality for what it really is.

Reading Bill Barnett’s article it struck me for the first time that one of the most common sources of post investment tension between investors and entrepreneurs is a tension between optimism and realism. When the relationship between investor and entrepreneur is strong that tension is healthy, but when the relationship breaks down it often leads to each side losing faith in the other’s judgement. Investors’ realism can start to look like (and may become) undue pessimism and scepticism, and entrepreneurs’ optimism can start to look like (and may become) naive optimism and an irrational unwillingness to change course.

I write this in the hope that it will help investors to better understand where entrepreneurs are coming from and vice versa, and thereby help to keep relationships trusting and healthy. There is more than a grain of truth in the old joke that the investor-entrepreneur relationship is like a marriage, but harder to get out of, and just like a marriage the relationship will work best when the differences are both understood and valued. Good investors understand that optimism is a very helpful trait and strong entrepreneurs value the check on their optimism that investors can provide.